When is Real Estate Reported as a Business Asset on the FAFSA?

Families prefer to report real estate as a business or farm asset
because these assets have less of an impact on the student’s expected
family contribution (EFC) than investment assets. Certain types of
business assets are excluded from the FAFSA, and reportable business
assets are adjusted to protect part of the net worth from need
analysis.

The small business exclusion allows the applicant to omit the net
worth of a small business from the FAFSA. A small business has 100
full-time or full-time equivalent employees and is owned and
controlled by the family. More than 50% of the business must be owned
by people who are directly related by birth or marriage. (The family
members who own the business do not have to all be counted in the
household size on the FAFSA to qualify for the small business
exclusion.)

If real estate is reported as a business asset on the FAFSA, the
federal need analysis formula partially shelters the net worth of the
asset by reducing its value according to a bracketed scale. The first
several hundred thousand dollars of the net worth is reduced by 40 to
60 percent.

The net worth of a business is calculated by subtracting any debt
secured by the business from the current market value of the
business. If the business was not used as collateral on the loan, the
debt is not subtracted from the value of the business. For example, if
family used a home equity loan on their home to fund the business, the
debt is not subtracted from the value of the business because the loan
is secured by the family home and not the business. Similarly, credit
card debt on a personal credit card does not reduce the net worth of
the business.